Do you need renewable energy stocks in your portfolio?

The government’s carbon tax has pushed ethical investing into the spotlight and share prices of stocks in the renewables sector are starting to look greener. There has been some commentary in the media recently that investors without exposure to the renewable energy sector are at risk of losing out on future gains. Or, more to the point, investors with too high an exposure to carbon polluters could be at risk of faltering returns as share prices flatten.

It’s undeniable that the world is transitioning from a world motored on oil, coal and gas, to a world run on a more diverse mix of alternative and renewable energy sources. Global investment in renewable energy last year sat at a record $US211 billion ($A198 billion), increasing by 32% over 2009 and 540% since 2004. China accounted for more than a fifth of the total, investing $US48.9 billion ($A45.9 billion).

The government’s $13 billion Clean Energy Package pushes the case for renewable energy - with $10 billion over five years to be invested in renewables and low emissions technologies (not Carbon Capture and Storage), with a further $3.2b in renewable sector funding.

The big investors, like fund managers and professional investors, are taking note. In its climate change report, Mercer argued that investment firms are beginning to increase their allocation to climate sensitive assets in order to capture new opportunities and help mitigate risks. Indeed, fund managers and professional investors are realising the benefits of bolstering exposure to companies and funds that benefit from a carbon tax, which include clean technology and renewable energy stocks across waste, solar, water, wind, biofuel, geothermal, carbon and others.

What does this tell us? Well, if the funds are getting in, the best companies in these sectors have only one way to go - and that’s up.

The worry for small investors is the risky and untested nature of many renewable energy technologies, and the fact that not all renewable energy technologies will reach commercialisation. Many of these companies are in the pure speculative end of the investing spectrum with many hurdles to jump even before they qualify for government funding, let alone spin a profit.

The table below offers a snapshot of the major sectors and companies in the renewable energy and clean technology space, and their yearly share price performance. As you can see, returns are hardly impressive.

Based on share price performance, there have been many more losers than winners over the past 12 months, with some stocks, like Infigen (INN), the old Babcock & Brown Wind Partners Group sliding by 65%. Another wind stock, Viridis Clean Energy Group (VIR), tumbled by 77% over the past year.

Worthy of note are a couple of standout performers, such as the Carbon sector stocks, CO2 Group and Carbon Conscious. CO2 Australia is a reforestation company that sells carbon credits to big companies like Origin Energy. The government's decision to put a $23 price on carbon was the news CO2 had been waiting for. On the day of the carbon announcement it said: "Today's announcement revealed that the carbon price is likely to impact around 500 large carbon emitters in Australia, and with CO2 working with just 10 companies locally, our growth prospects are indeed compelling."

It’s not easy to determine which sector in the renewable energy space is the best bet. Should you be folowing the travails of wind, solar or geothermal stocks, or simply buying into the Carbon sector itself via companies like CO2?

According to Susan Jeanes, chief executive of The Australian Geothermal Energy Association (AGEA), geothermal power is the only baseload renewable technology with the capability to replace large coal generators. (Baseload simply means the minimum amount of electic power than can be delivered over time at a steady rate). So which geothermal stocks are the punters watching?

The stocks attracting the lion's share of attention seem to be Geodynamics and Petrotherm; however, neither have rewarded investors over the past 12 months.

Geodynamics, which is backed by Origin Energy, is aiming to bring the vast Cooper Basin geothermal resource to market. Between now and early 2013 its objective is to construct a commercial sized demonstration power plant.

According to Geodynamics, the 25 MW power plant, which will be for commercial operation and produce zero emissions with zero water requirements, will produce enough elecricity to power approximately 25,000 households on a continuous basis.

In a recent 18 Share Tips, however, James Cooper from Morningstar put a sell recommendation on Geodynamics, citing that the company is in early stage with no cash flow, and profitable extraction from its plant in the Cooper Basin is unproven.

Petrotherm, on the contrary, is starting to show some results. Just recently, the company announced that its fracture tests at its Paralana well were successful, indicating that the company should be able to extract energy from the hot rocks around 3,500 to 4,000 metres undergound. The Paralana 2 well established temperatures at 176 degrees celcius at around 3,670 metres with expectations of 190 degrees celcius at 4000 metres. The successful completion of these tests are positive step for Petrotherm, but it's a long road ahead.

It's easy to get hyped by the dawn of a new carbon conscious world and throw all your savings into renewable energy stocks. However, the dismal looking share prices below are the reality of investing in new technology; it's risky, and there will be many failures along the way.

However, Mercer has a point when it warns that retail investors need to start studying this sector more closely. And this is particularly the case if fund managers start dabbling in it as well. When the flow of money hits this sector, you'd want to be on board. The catch is to find the best stocks to take your cash - and that's where you have to do your research, and plenty of it.